ASSUMPTIONS IN CAPITAL BUDGETING:

The Capital Budgeting decision process is a multi-faceted and analytical process. A number of
assumptions are required to be made.

1. Certainty with respect to cost & Benefits: It is very difficult to estimate the cost and
benefits of a proposal beyond 2-3 years in future.
2. Profit Motive : Another assumption is that the capital budgeting decisions are taken with
a primary motive of increasing the profit of the firm.

The activities can be listed as follows:

 Dis-investments i.e., sale of division or business.
 Change in methods of sales distribution.
 Undertakings an advertisement campaign.
 Research & Development programs.
 Launching new projects.
 Diversification.
 Cost reduction.

FEATURES OF INVESTMENT DECISIONS:

 The exchange of current funds for future benefits.

 The funds are invested in long-term assets.
 The future benefits will occur to the firm over a series of years.

IMPORTANT OF INVESTMENT DECISIONS:

 They influence the firm’s growth in long run.

  They effect the risk of the firm.
 They involve commitment of large amount of funds.
 They are irreversible, or reversible at substantial loss.
 They are among the most difficult decisions to make.

TYPE OF INVESTMENT DECISIONS:

 Expansion of existing business.
 Expansion of new business.
 Replacement & Modernization.

INVESTMENT EVALUATION CRITERIA:

 Estimation of cash flows.

 Estimation of the required rate of return.
 Application of a decision rule for making the choice.